Price control after natural disasters may misallocate scarce resources to less urgent needs

Summary of a report by Dwight Lee

The Freeman

January 1999

Once market prices are recognized as a means of communication, we can understand why government price controls are a particularly harmful form of censorship. And the harm is greatest at times of natural disasters because the victims are desperate to communicate their need for help.

After a natural disaster, prices generally increase sharply for labor, construction materials, electric generators, and a host of other products needed for recovery and comfort. The common explanation for these price increases is that unscrupulous suppliers are profiteering at the victims' expense. Suppliers may be profiting by raising prices, but the higher prices also help disaster victims effectively communicate their need for help to those who are most able to provide it. Price controls prevent this from happening by censoring communication among victims.

With price controls, victims who have the most urgent need for scarce supplies cannot communicate their urgency by offering higher prices. Similarly, there is no incentive for sellers of scarce supplies to sell them to only those who need them the most. So a hardware store owner may sell a much sought-after gas-powered electric generator to his friend to run his electric shaver rather than to grocery-store owners who badly need the generator to keep their thousands of dollars' worth of food from spoiling.

Without price controls, one of those grocery stores would have offered a higher price for the generator, effectively communicating (on behalf of customers) that it had a more urgent use for it than the hardware-store owner's friend had. Of course, without price controls, all those who need generators would have quickly secured them because they would have been able to communicate their need with suppliers outside the disaster area.